The Impact of Meteorological Factors on Crop Price Volatility in India: Case studies of Soybean and Brinjal

TL;DR

This study investigates how meteorological factors influence crop price volatility in India, using advanced statistical and machine learning models on case studies of soybean and brinjal, to aid agricultural decision-making and policy.

Contribution

It introduces a comprehensive approach combining EGARCH, SARIMAX, LSTM, and CAR models to analyze meteorological impacts on crop price volatility in Indian states.

Findings

Meteorological variables significantly affect crop price volatility.

Machine learning models effectively predict volatility based on climate data.

Spatial dependencies influence regional price risk patterns.

Abstract

Climate is an evolving complex system with dynamic interactions and non-linear feedback mechanisms, shaping environmental and socio-economic outcomes. Crop production is highly sensitive to climatic fluctuations (and many other environmental, social and governance factors). This paper studies the price volatility of agricultural crops as influenced by meteorological variables, which is critical for agricultural planning, sustainable finance and policy-making. As case studies, we choose the two Indian states: Madhya Pradesh (for Soybean) and Odisha (for Brinjal/Eggplant). We employ an Exponential Generalized Autoregressive Conditional Heteroskedasticity (EGARCH) model to estimate the conditional volatility of the log returns from 2012 to 2024. We further explore the cross-correlations between price volatility and the meteorological variables followed by a Granger-causal test to analyze the causal effect of meteorological variables on the volatility. The Seasonal Auto-Regressive Integrated Moving Average with Exogenous Regressors (SARIMAX) and Long Short-Term Memory (LSTM) models are implemented as simple machine learning models of price volatility with meteorological factors as exogenous variables. Finally, to capture spatial dependencies in volatility across districts, we extend the analysis using a Conditional Autoregressive (CAR) model to construct monthly volatility surfaces that reflect both local price risk as well as geographic dependence. We believe, this paper will illustrate the usefulness of simple machine learning models in agricultural finance, and help the farmers to make informed decisions by considering climate patterns and making beneficial decisions with regard to crop rotation or allocations. In general, incorporating meteorological factors to assess agricultural performance could help to understand and reduce price volatility and possibly lead to economic stability.